Nanometrics Incorporated (NASDAQ:NANO): Can Growth Justify Its July Share Price?

Simply Wall St
July 30, 2019

Nanometrics Incorporated (NASDAQ:NANO) is considered a high-growth stock, but its last closing price of $35.1 left some investors wondering if this high future earnings potential can be rationalized by its current price tag. Let’s take a look at some key metrics to determine whether there’s any value here for current and potential future investors.

Exciting times ahead?

Nanometrics is poised for extremely high earnings growth in the near future. The consensus forecast from 6 analysts is extremely positive with earnings forecasted to rise significantly from today’s level of $1.826 to $2.802 over the next three years. On average, this leads to a growth rate of 24% each year, which illustrates a highly optimistic outlook in the near term.

Can NANO’s share price be justified by its earnings growth?

NANO is trading at price-to-earnings (PE) ratio of 19.22x, which suggests that Nanometrics is undervalued based on its latest annual earnings update compared to the Semiconductor average of 23.26x , and overvalued compared to the US market average ratio of 17.95x .

NasdaqGS:NANO Price Estimation Relative to Market, July 30th 2019

Given that NANO’s price-to-earnings of 19.22x lies below the industry average, this already indicates that the company could be potentially undervalued. However, to properly examine the value of a high-growth stock such as Nanometrics, we must reflect its earnings growth into the valuation. I find that the PEG ratio is simple yet effective for this exercise. A PE ratio of 19.22x and expected year-on-year earnings growth of 24% give Nanometrics a low PEG ratio of 0.80x. This means that, when we account for Nanometrics’s growth, the stock can be viewed as fairly valued , based on the fundamentals.

What this means for you:

NANO’s current undervaluation could signal a potential buying opportunity to increase your exposure to the stock, or it you’re a potential investor, now may be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:

Financial Health: Are NANO’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.

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